Increased optimism about the pace of an economic recovery helped the stock market and hurt bond markets this week. As a result, mortgage rates ended the week a little higher. Mortgage rates are being pressured by concerns that an economic rebound will bring increased inflation sooner than recently thought. In addition, large Treasury auctions are adding significant supply to the market, forcing yields higher. Fortunately, foreign investors remain active buyers and Fed purchases continue at a strong pace.

Comments from Fed Chief Bernanke and generally stronger than expected economic data fueled upward revisions to the consensus economic forecast this week. In Tuesday’s testimony to Congress, Bernanke offered his most optimistic economic outlook since the recession began. He expects economic activity to “bottom out, then to turn up later this year”. He warned that the labor market may recover very slowly, but he expects that the Unemployment Rate will peak below 10%. He pointed to the decline in mortgage rates as a successful outcome of Fed programs and suggested that there have been signs that the housing market may be near a bottom. Housing sector data released during the week supported his view. Pending Home Sales, a leading indicator for the housing market, rose 3%, and Construction Spending posted gains as well.

In a typical economic recovery, the labor market is one of the last areas to turn around, and the pattern is expected to hold this year. The April Employment report showed that the economy lost -539K jobs, which was a large number but fewer than expected. The Unemployment Rate rose to 8.9% from 8.5% in March. The consensus outlook is that a pickup in the job market will lag an improvement in the overall economy by several months.

The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Thursday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales on Wednesday and Industrial Production on Friday will provide important indications of economic activity. Retail Sales account for about 70% of economic activity. The Trade Balance, the Empire State index, and Consumer Sentiment will round out a busy week